Polished diamond prices are no longer in a free fall, according to the IDEX Online Global Diamond Price Index. After peaking last summer, polished diamond prices declined sharply beginning in October 2008, a trend that continued through January. However, while diamond prices fell during the first week of February, they leveled off for the remainder of the month.

 

The following graph illustrates daily polished diamond prices for the past three months. It is clear that prices leveled out in February.

 

Source: IDEX Online

 

 

It is way too early to tell if this trend of polished diamond price stabilization is merely a pause in an otherwise strong downdraft, or is, in fact, indicating that we may be approaching the bottom of the trough. However, some hopeful factors may be influencing polished diamond prices:

 

• U.S. trading picked up in mid-February, so there is some optimism in the air.

• Panic selling by diamantaires has abated.

• Diamond trading in India perked up in anticipation of the marriage season, though it has slowed somewhat since then.

• Rough diamond suppliers have pledged to cut back dramatically on the sale of diamonds. This should help stabilize and bring balance to the polished diamond market.

We continue to be impressed at the orderliness of the polished diamond price market. In the U.S., which represents about half of the world’s demand by value, jewelry sales at specialty jewelers fell by 16 percent in the final quarter of the year, and were down just over 18 percent during the Christmas selling period.

 

Despite these extremely weak results, polished diamond prices are down only about 15 percent from their peak, according to the IDEX Online Global Polished Price Index. If the polished diamond trading markets reacted like the U.S. stock market, prices would have been down more than 50 percent, at least. When the diamond trading markets are opened up to non-diamantaires – especially financial types with a short span of attention such as day traders – the industry can expect significantly more volatility in polished diamond prices, in our opinion.

 

Long Term Price Trend Weak

The graph below illustrates polished diamond prices for the past 24 months. As expected, prices during January 2009 broke down through the long term growth rate. While prices appeared to stabilize in February, it is too early to tell if we have reached the bottom. It is more likely that polished diamond prices will continue to weaken modestly for several more months, before reaching bottom and turning solidly upward. It will take a strong signal from consumers that they are ready to buy diamonds again, before the markets are likely to show price inflation.

 

 

Source: IDEX Online

 

Monthly Polished Diamond Price Trends:

February 2009 versus January 2009: (4.4 percent)

For the month of February 2009, average global polished diamond prices declined by 4.4 percent versus average diamond prices during January 2009. This was the second largest price decline since November 2008, when prices fell 4.8 percent month-to-month. However, despite continued weak demand, polished prices held more firmly than we would have expected. Diamond prices began to soften in the early fall of 2008, after almost six months of unusually high inflationary pricing for polished stones.

 

On an annualized basis, February’s price decline represents about a 50 percent annual deflation rate for polished diamonds. Clearly, that is an unrealistic deflation rate. The current deflationary trend is beneficial to downstream participants in the diamond pipeline since their margins have been squeezed for sometime, with a particular tightening in 2008.

 

However, the mining sector is feeling a negative impact from lower revenues due to weaker demand and reduced prices for both rough and polished stones. Many mining operations have shut down, at least temporarily.

 

We believe history is a great forecaster for the future. If so, the rate of diamond price deflation will begin to moderate later this year, and the longer term inflation rate will return. It may be several months before we reach bottom, but prices will bottom at some point. The IDEX Online Polished Diamond Price Index, calculated on the average daily prices during February 2009, stood at 110.60 for the month, down from 115.71 for the month of January 2009. At the end of February, the IDEX Online Polished Diamond Price Index had slipped to 110.21, reflecting some firmness in prices during the month. The Index stood at 100.00 in July 2004.

 

The graph below summarizes month-over-month changes in global diamond prices for the past thirteen months. Beginning in February 2008, polished diamond prices showed large gains during every month in the first half of the year. Since then, price increases have moderated significantly as consumer demand has weakened.

 

Source: IDEX Online

 

February 2009 versus February 2008: (6.2 percent)

On a year-over-year basis, global polished diamond prices dipped by 6.2 percent in February versus the same month a year ago. This was the seventh consecutive month of deceleration of year-over-year price increases for polished diamonds, and it was the second month that year-over-year prices dipped for polished diamonds. On a year-over-year basis, almost all key diamond sizes experienced price deflation.

 

We think that polished diamond prices are likely to continue to decline, though at a more modest rate. They have dipped below the historical trend line inflation rate of 3-4 percent annually, though we believe that they will return to this historic rate of annual inflation.

 

The historical inflation rate of 3-4 percent annually is sustainable, in our opinion, over the long term. While some forecasters are predicting a “new economy,” diamonds and diamond demand have remained more or less on the sidelines during the recent turmoil in the commodities markets.

 

Thus, we believe that they are more likely to remain relatively untouched in the future, once the U.S. and the global economies stabilize. Based on 50,000 or more years of demand trends, we do not expect to see any major shift in consumer demand for diamonds or other jewelry.

 

Finally, we believe that polished diamond prices will ultimately reflect market demand and supply; when demand stabilizes, prices will also stabilize. The IDEX Online Polished Diamond Price Index stood at 110.60 in February 2009 versus 117.93 in February a year ago.

 

The graph below summarizes the year-over-year inflation rate by month for polished diamond prices in the global market for the past thirteen months.

 

Comparisons are based on the daily average prices during the month versus the same month a year ago. The year-to-year comparison takes into account the seasonality of polished diamond demand and prices.

 

Source: IDEX Online

 

The graph below compares diamond prices for selected key diamond categories. The price comparisons are based on end-of-month prices – January 31versus February 28.

 

Source: IDEX Online

 

Forecast: Diamond Prices Likely to Continue to Soften Near Term

Like prices for all goods and commodities, inflation worries have given way to deflation concerns. Deflationary pricing is not good for anyone or any economy. However, polished diamond prices rose at unrealistic rates in the first half of 2008, and now have retreated below the long term growth rate. We don’t look for prices to stabilize soon. There simply is too much uncertainty related to the global economic situation. Further, the natural cycle calls for diamond prices to continue to decline, though perhaps at a slowing rate, before recovering to their historic trend line.

 

The IDEX Online Diamond Price Index

The IDEX Online Diamond Price Index is a real-time index derived from actual asking prices in the global diamond industry. The IDEX Online Diamond Price Index objectively reflects price trends as they happen. The Diamond Index and Diamond Drivers were formulated following comprehensive research and analysis of the IDEX Online inventory database, aggregated since 2001. Research and development were conducted in cooperation with Dr. Avi Wohl, Senior Lecturer of Finance at the faculty of Management, Tel Aviv University, Israel.

 

Additional information is available from IDEX Online Research. The e-mail address is diamondprices [at] idexonline [dot] com.